Financial Markets' Quadrophenia... DIS and KFT pay up... Sjug: $1,000 gold is here to stay... Buffett selling stocks...

Dr. Jimmy and Mr. Jim/When I'm pilled you don't notice him/He only comes out when I drink my gin...

That's from Quadrophenia, The Who's second rock opera. The lead character, Jimmy Cooper, has four personalities, hence the Jekyll/Hyde-ish reference above.

The financial markets have a chronic case of Quadrophenia, too. A couple of them seem to have gotten into Jimmy Cooper's gin...

First, of course, there's Mr. Market himself, currently reveling in the throes of a manic high, just six months (almost to the day) after hitting suicidal, depressive lows. Today, the happy idiot is offering 26 times earnings for every publicly traded company in America. That's the recent price-to-earnings ratio of the Wilshire 5000 index, which contains all U.S. stocks, from ExxonMobil down to stocks of less than $1 million in market cap.

Twenty-six times earnings could be a bargain – if you can wait 100 years or so to make money. Otherwise, it's an earnings yield of 3.85% – less than the longest date Treasuries, a pittance. Paying $50 for every $1 of dividends also seems like an exceedingly long-, long-, long-term prospect.

Mr. Market is drinking and buying and buying and drinking like he's going to live forever, a true long-term growth investor if ever there was one... oh, but there's more than just one. Try 1,500... Bloomberg surveyed 1,500 equity analysts who expect S&P 500 earnings to rise 25% next year.

Now, I think it's actually smart to ignore the other survey – the one in which 53 economists say the economy will grow just a little more than 2% next year – and believe the 500 largest companies will grow more than the overall economy...

But expecting the S&P 500 to outgrow the overall economy by a factor of 12.5 as the worst credit crisis in history continues to cause banks and other companies to fail... well... it just seems a bit on the Mr.-Market-sucking-down-the-gin side of things. Just because the recent rally has stocks up about 50%, Mr. Market thinks they'll never fall again.

With Mr. Market overpaying for earnings, dividends, and growth, Disney's offer of less than 18 times free cash flow for Marvel Entertainment looked rather reasonable by comparison. And contrary to what the financial media has reported, it was reasonable.

Marvel could easily be worth that price to Disney, the single largest retail licensing entity on the planet. Marvel has more personalities than Jimmy Cooper and the financial markets combined: 5,000 heroes, villains, and other characters, some of whom I'm sure you'll be seeing a lot more of, which will mean dollars for Disney.

Don't be surprised, either, to see Kraft Foods make another, higher offer for Cadbury, the British candy company. Kraft offered $16.7 billion over the weekend for Cadbury. I bet it doesn't get the deal done for less than $20 billion (about 12 times EBITDA).

Disney and Kraft are paying a premium for businesses they understand at least as well, and probably better, than the people who currently own them. But Mr. Market doesn't know anything about business except what they tell him on CNBC... which is nothing. He's paying 26 times earnings because he thinks there's an even drunker fool who'll pay... what?... 30, 40, 50 times earnings in the near future?

So much for Mr. Market's insatiable appetite for equities. A couple of the financial market's other personalities have been acting up lately, too. Consider the curious case of Dr. Copper and Mr. Gold. Dr. Copper has nearly doubled in the last six months. And Mr. Gold traded for more than $1,000 an ounce today.

Maybe this story is too transparent, though. It's so easy to see why the metals are acting up, once you get familiar with the market's fourth personality – the real villain in our financial drama.

The troublemaker who's jacked up the price of everything I buy at the store and everything I'm interested in owning in the financial markets is none other than that creepy old pervert, Uncle Sam.

He's the most sadistic fiend who ever was. When you work for $1, he takes 50 cents of it. When you find a way to make $2, he prints another $2, destroying the value of your labor. When you try to move your $2 to another country, he steals $1 and then says you still owe him taxes every year, no matter where you live. He acts like he owns you. The old sod seems unable to take his damn hands off you!

To Uncle Sam, you're a kidnap victim, locked in the basement and forced to work for a little food and primitive shelter. If you try to escape, he comes down on you twice as hard.

Dr. Copper and Mr. Gold know about old Uncle Sam. They have a fair idea of what he's up to, and they don't like it one bit. They know he has already committed more than $13 trillion to bailing out big banks and other companies he says are "too big to fail," banks that just happen to be run by his degenerate pals. They know that money doesn't grow on trees. They know what it takes to get a pound of copper or an ounce of gold out of the ground. When Uncle Sam prints money, they charge more for their services, plain and simple.

Uncle Sam doesn't care what they know, though, because he's got the cops in his back pocket and does as he pleases. At some point, another of Uncle Sam's friends at some big bank will fail... and they'll all get bailed out with shiny new dollars, printed up by Uncle Sam.

Then, maybe a few hundred – some say 1,000 – more small banks will fail, eating up the FDIC deposit insurance fund, which has fallen more than 75% the past year, to just $10.4 billion. I promise you, it's impossible to insure more than $4 trillion of deposits with a $10 billion reserve. Five more banks shut down last week, bringing the year's total to 89. It'll easily top 100 by New Year's.

The FDIC will go bust. Then, Uncle Sam's Treasury will have to recapitalize it with a line of credit... a debt that – one way or the other – will wind up on the Fed's balance sheet.

No wonder Dr. Copper and Mr. Gold have raised their rates. Uncle Sam is running a rigged game, and sooner or later, all rigged games get found out. Dr. C and Mr. G are merely keeping a step ahead of him. The more the Fed prints, the more they charge.

And if you're afraid you missed the run in gold, fear not. Dr. Sjuggerud says it's not too late...

In Friday's DailyWealth, Steve Sjuggerud declared gold will stay above $1,000 this time around... Steve notes that in a real bull market, an asset will hit a new high as optimism surrounding the asset peaks – as was the case with gold in March 2008. Then, optimism wanes and the asset price falls. Later, the asset moves sideways, shaking out all the nonbelievers before reaching a new high.

Despite the rampant inflation fears, gold hadn't closed at more than $1,000 since March, raising fears of what would happen to the metal as confidence returned to the market. Well, confidence has returned – evidenced by the S&P 500's 50% gain since March, and gold, surprisingly, has steadily marched upward. Steve writes:

People simply haven't been buying gold "hand over fist" lately. But if gold closes over $1,000 a few times, they will. Gold will be all over the news, and the average investor (who hasn't bought yet) will finally start to get in. He'll sell his stocks that have soared but have recently run out of gas... and move his money over to gold.

Regardless of the personality the market is wearing today, George Huang's FDA Report subscribers are doing great...

On Friday, his July recommendation Facet Biotech (FACT) received a hostile takeover offer from its partner Biogen Idec (BIIB). The all-cash $14.50-per-share offer represents a 60% premium to Facet's closing price on Thursday. FDA Report readers are up more than 80% in two months. But George predicts there's more to come...

George recommended the stock at a deep discount to the amount of cash on the books. Biogen's offer, even with the big premium to Thursday's close, is roughly equivalent to Facet's cash hoard. A near-zero premium to cash is the equivalent to a slap in the face to Facet shareholders. The company's board officially rejected the bid as too low this morning. Clearly, this negotiation is far from over... and FDA Report subscribers are going to enjoy the ride.

Facet is one of three of George's biotech recommendations trading less than cash. To get the other two names, click here.

New highs: Market Vectors Gold Miners ETF (GDX), iShares Silver Trust (SLV), Silver Wheaton (SLW), Fairfax Financial Holdings (FFH), International Royalty (ROY), Goldcorp (GG), Silvercorp Metals (SVM), Barrick Gold (ABX), Kinross Gold (KGC), Sino Gold (SGX.AX).

In the mailbag... get-aways of all kinds... send your utopian fantasies to [email protected].

"Here's a daydream: Why not build a country in the ocean outside of some country's continental jurisdiction. Sort of like inverse Dutch land reclamation. Start with platforms made out of recycled plastic that floats – ought to be plenty of that around and it sure isn't biodegradable. Invite businesses to locate there tax free – but they have to add to the plastic raft and figure out power and water for themselves and a few employees, that sort of thing.

"Use the original US constitution and clarify a few points that hindsight shows us need clarifying. Once the 'raft' got big enough it would become stable and virtually limitless in potential size. Let the citizens arm themselves with whatever they want. Citizenship would be based on the ability to build onto the raft and support themselves. Dual citizenship would be required so they could be bought out and sent home if they can't make it on their own or practiced criminality. Set up a gold based currency, outlaw fractional reserve banking and let the free market figure out how to maintain and grow the darn thing. And we can call it 'Oceania.' Sure, why not?" – Paid-up subscriber Steve Brooks

"Live and earn in Washington state (no state income tax) and shop across the border in Oregon (no sales tax). Pretty country, too. At least, I think it's nicer than the Rogue Valley, although it gets rainier than southern Oregon." – Paid-up subscriber Jonathan

Ferris comment: Sounds like a plan. They just jacked our state income tax up. I'm about done with this place.

Regards,

Dan Ferris and Sean Goldsmith
Medford, Oregon and Miami, Florida
September 8, 2009